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What is the Canada Pension Plan?

Victoria Morrison
Surfs up

The Canada Pension Plan (CPP), like its Quebec counterpart, the Quebec Pension Plan (QPP), helps provide a safety net for those who pay into it. It can help cover lost income when a contributor stops earning income due to retirement, disability or death.  Read on to learn more about the Canada Pension Plan.

What is a pension plan in Canada?

Most Canadian workers over the age of eighteen contribute to the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP). You will pay into the Quebec Pension Plan if any one of the following conditions applies:

  • When you have only worked in Quebec.
  • You worked in Quebec and at least one other province and currently live in Quebec.
  • Or you worked in Quebec and at least one other province, and you live outside of Canada but the last Canadian province you lived in was Quebec.

The purpose of the QPP is the same as that of the CPP. Essentially, the QPP is "a compulsory public insurance plan for workers age 18 and over whose annual income is greater than $3500." The basic exemption amount for the CPP is also $3500 as of 2018.  If you've been a resident of several provinces including Quebec, you may have paid into both plans. In that case, to collect a pension you would apply to the QPP if at the time of application you lived in Quebec, or to the CPP if you resided outside Quebec.

Different types of CPP pensions

Depending on the circumstances that prompt the application, the CPP may pay benefits through different programs.

  • Retirement pension: You can apply for and receive a full CPP retirement pension at age 65 or receive it as early as age 60 with a reduction, or as late as age 70 with an increase.
  • Post-retirement benefit: If you continue to work while receiving your CPP pension, and are under age 70, you can continue to participate in the CPP. Your CPP contributions will go toward post-retirement benefits, which will increase your retirement income.
  • Disability benefits: If you become severely disabled and are unable to work at any job on a regular basis, you and your children may receive a monthly benefit.
  • Survivor's pension: When you die, a pension may go to your surviving spouse.
  • Death benefit: This is a one-time payment to (or on behalf of) the estate of a deceased CPP contributor.
  • Children's benefits: These provide monthly payments to the dependent children of disabled or deceased CPP contributors.
Older Caucasian couple sitting on beach with surfboards

CPP provisions

The CPP makes provisions for families and couples. These include:

  • Pension sharing: Married or common-law couples in an ongoing relationship may voluntarily share their CPP retirement pensions.
  • Credit splitting for divorced or separated couples: The CPP contributions you and your spouse made when you lived together can be equally divided after divorce or separation.
  • Child-rearing provision: If you stopped working or received lower earnings to raise your children, this provision may increase your CPP benefits.
  • The QPP orphan's pension may go to a minor biological or adopted child, until the child turns 18, in the event of the death of the parent or caregiver with whom the child was living.

2019 maximum pensionable earnings and the maximum annual self-employed contribution

Just as there is a basic exemption amount for income eligible for CPP contributions, there is also a cap. This amount is called maximum pensionable earnings (MPE). For 2019, both the CPP and the QPP set this amount at $57,400. In the case of the CPP, the employer and employee contribution rate is 5.10%.  The maximum contribution rate for employees and employers is 5.55% for the QPP. For self-employed workers, the maximum annual contribution is $5497.80 for the CPP and $5,982.90 for the QPP.

How does the Canada pension plan work?

Anyone whose pensionable employment income exceeds $3,500 must contribute to the CPP (or QPP). This rule applies to both employees and the self-employed. "Pensionable employment is any employment for which a pension plan or fund has been set up," as the CRA defines it. As such, the CPP is a mandatory plan.

CPP for employers and employees

By requirement, employers deduct CPP contributions from their employee's pensionable earnings. At the same time, employers contribute an equal amount to the CPP. Recall that freelancers and contract workers are not considered employees.  For employers, to determine the amount to remit for CPP contributions in a given period, add the amount deducted from an employee's salary and your matched amount. For example:

CPP contributions deducted from your employee's monthly salary = $240.40

Your share of CPP contributions = $240.40

Total CPP contributions = $480.80

If your employee's annual earnings reach the maximum pensionable earnings amount, you can stop deducting and matching CPP contributions.¬†You can also stop after reaching the maximum employee contribution for the year ($2,748.90 for 2019).  Employees can find the amount of contributions already made in boxes 16 and 17 of their T4 slip. You might find payroll software helpful.

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CPP for self-employed workers

If your net self-employment income and pensionable income exceeds $3,500, you must contribute to the CPP. Information about CPP contributions is entered on line 222, line 310, and line 421 of Schedule 1 of your return, and in Schedule 8 (Form RC381 in Quebec).  The difference between self-employed workers and employees when it comes to the CPP is that self-employed workers pay the full amount of CPP contributions themselves. Employees and employers divide it between them.  The 2019 maximum pensionable earnings amount for all types of workers is $57,400. Self-employed CPP contributions are equal to 10.2%. QPP contributions are set at 11.10 percent.  

Older Caucasian couple sitting on beach with surfboards

Receiving your pension

No matter how long you've been paying into the CPP or QPP, you must apply in order to receive your pension. The CPP retirement plan provides monthly payments to eligible applicants.  To be eligible to apply for the retirement pension, all of the following must apply:

  • You're at least one month past your 59th
  • You've worked in Canada and made at least one valid contribution to the CPP
  • You want to begin receiving payments within 12 months

Applying to receive your pension is a big step. Like a bank, the CRA wants you to leave your money with them for as long as possible. The CRA advises people to consider the following factors before applying to receive your CPP pension:

  • Age - the default retirement age is currently 65. You may receive a slightly lower pension if you retire earlier, or a slightly higher one if you retire later.
  • Whether you plan to continue working.
  • How much you have contributed and for how long you've been making contributions.
  • Review the state of your personal savings, investments or company pension plan.
  • Your retirement plan.
  • Look at your current state of health, family health history, or any disabilities.
  • Whether you have any other kind of income such as rental income or investments.

Looking for hard numbers? Try the CRA's Retirement Income Calculator. You can also check your CPP Statement of Contributions if you have a My Service Canada Account.

General drop-out provision

If you go through periods when you have no income, the CPP automatically drops a number of your lowest-earning months. This helps protect you when your CPP benefit is calculated. Up to eight years of your lowest earnings can be omitted from the calculation.

Child-rearing provision

Parents or primary caregivers who stop working or work less to raise children may qualify for the child-rearing provision. The time during which you were responsible for the child or children's day-to-day needs will be excluded from your CPP contributory period. This will help you get the highest possible payment.  You may be eligible for the child-rearing provision under the following circumstances:

  • The child or children were born after December 31, 1959.
  • You received lower earnings to help raise children under the age of seven.
  • You or your spouse or common-law partner received Family Allowance payments or were eligible for the Canada Child Tax Benefit.

The child-rearing provision may only be used by one of the parents.  

Older Caucasian couple leaning on convertible car with surfboard on beach

 You may request the child-rearing provision using Form ISP1640. There are sections for child-rearing on the CPP retirement pension application form (ISP1000), and in the CPP Disability Benefit application form (ISP1151).  For each child, be sure to have available at least one of the following:

  • The child's name, date of birth, and Social Insurance Number
  • The child's birth certificate (original or true certified copy)

For children born outside of Canada, the date of entry into the country could come into question.

What if you die before you apply for your retirement pension?

Provided you were over 70 at the time of death and your estate submits a CPP retirement pension application within one year, up to 12 months' pension may be paid to your estate. If minimum contribution requirements are met, your estate, spouse or common-law partner, or next-of-kin may qualify for the death benefit.  Survivor's pension may be possible for your spouse or common-law partner. Dependent children may be eligible for the CPP children's benefit.

How to invest in the Canada Pension Plan

The Canada Pension Plan is not a publicly traded entity, although the Canada Pension Plan Investment Board (CPPIB), created in 1997, has been posting some healthy profits. The Toronto Star reported that as of March 2018, "the CPP Fund had net assets of $356.1 billion," earning an 11.6 percent return on investments for fiscal 2018.  The CPPIB uses strategies such as "Total Portfolio Management" to fulfill their stated mandate: "to maximize returns without undue risk of loss." The Investment Board additionally provides cash management services to help the Canada Pension Plan distribute benefits.  We hope you've found some of what you need to know here! Deciding to apply for a pension is a very personal decision. CRA and Revenue Quebec advice are helpful, but only you and your family can know what's in your best interest. Good luck.

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